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This first chart shows the inflation-adjusted value of the increasingly-popular S&P/Case Shiller Home Price Index. Prices have been essentially flat for the past 18 months. It's tempting to see a bit of weakness in the most recent months, however. Many observers are calling for a renewed decline in prices due to a flood of foreclosed homes hitting the market once the "robo-signing" problem gets straightened out. My view for some time has been that prices have fallen by enough already to clear the market and establish a new equilibrium level. In real terms, the average house price has fallen 35% from the early 2006 peak, and is only 15% above the early 2000 levels.

Taking into consideration that 30-yr fixed rate mortgage rates have declined from 6% in early 2006 to 4.5% currently, that equates to an effective decline in the monthly cost of purchasing a home of about 50%, not to mention the fact that real personal incomes are up over 6% since 2005. Do prices really need to fall further?

The second chart shows the Case-Shiller index of housing prices in 10 major markets (the first chart includes 20), and it includes data back to 1987. Prices today are 44% above the level of 1987, which equates to an annualized rate of gain of 1.5%. But again, this is less than the rise in real personal incomes (which averages about 3% per year), and less still considering that mortgage rates were in the low double-digits in 1987. Houses are far more affordable today than they were in 1987.

This last chart is an updated version of the one in Robert Shiller's book, "Irrational Exuberance." This inflation-adjusted index extends all the way back to 1890. Here we see that current real housing prices are 32% above their 1890 levels, which equates to an annualized rate of gain of only 0.2%, far lower than the rise in real incomes. It's no wonder that the average person can buy bigger and better houses today than their ancestors did.

None of these charts rules out a further decline in prices, but they do lend support to the view that prices have declined meaningfully to date, and are no longer out of line with historical price trends. Considering the ongoing rise in real personal incomes and the historically low level of mortgage rates today, the average home price has never been more affordable. I can't rule out further home price declines, but I think they are very unlikely.